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UNITED STATES DISTRICT COURTEASTERN DISTRICT OF KENTUCKYSOUTHERN DIVISION at LONDON

UNITED STATES OF AMERICA, et al.

Plaintiffs,

v.

DAIRY FARMERS OF AMERICA, INC., et al.

Defendants.

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Civil Action No.: 6:03-206-KSF

RESPONSE OF PLAINTIFF UNITED STATES TOPUBLIC COMMENTS ON THE PROPOSED FINAL JUDGMENT

Pursuant to the requirements of the Antitrust Procedures and Penalties Act ("APPA" or
"Tunney Act"), 15 U.S.C. § 16(b)-(h), the United States hereby files comments received from
members of the public concerning the proposed Final Judgment in this civil antitrust suit and the
responses by the United States to these comments. The United States and Commonwealth of
Kentucky will move the Court for entry of the proposed Final Judgment after the public
comments and this Response have been published in the Federal Register, pursuant to 15 U.S.C.
§ 16(d).

I. BACKGROUND

The United States and Commonwealth of Kentucky (the "government") filed a civil
antitrust Complaint under Section 15 of the Clayton Act, 15 U.S.C. § 25, on April 24, 2003,
alleging that the acquisition by Dairy Farmers of America, Inc. ("DFA") of its interest in
Southern Belle Dairy Co., LLC ("Southern Belle") violated Section 7 of the Clayton Act, 15
U.S.C. § 18. An Amended Complaint was filed on May 6, 2004.

The Amended Complaint alleged that the acquisition will likely substantially lessen
competition for the sale of milk to schools in one hundred school districts in eastern Kentucky
and Tennessee. On August 31, 2004, the District Court granted summary judgment to DFA and
Southern Belle. The government appealed, and on October 25, 2005, the Court of Appeals
reversed the grant of summary judgment as to DFA and remanded the case for trial. The Court of
Appeals affirmed the dismissal of Southern Belle, leaving DFA as the only defendant. See
United States v. Dairy Farmers of America, Inc., 426 F.3d 850 (6th Cir. 2005).

On October 2, 2006, the government filed a proposed Final Judgment that requires DFA
to divest its interest in Southern Belle and use its best efforts to require its partner, the Allen
Family Limited Partnership ("AFLP"), to divest its interest in Southern Belle. DFA proposed
divesting its interest and AFLP's interest in Southern Belle to Prairie Farms Dairy, Inc. ("Prairie
Farms"), and the government approved Prairie Farms as a suitable buyer of DFA's and AFLP's
interests in Southern Belle.

The government and DFA have stipulated that the proposed Final Judgment may be
entered after compliance with the Tunney Act. Entry of the proposed Final Judgment would
terminate this action, except that the Court would retain jurisdiction to construe, modify, or
enforce the provisions of the proposed Final Judgment and to punish violations thereof.(1)

II. STANDARD OF JUDICIAL REVIEW

Upon the publication of the public comments and this Response, the United States will
have fully complied with the Tunney Act and will move for entry of the proposed Final Judgment
as being "in the public interest." 15 U.S.C. § 16(e), as amended. In making the "public interest"
determination, the Court should apply a deferential standard and should withhold its approval
only under very limited conditions. See, e.g., Mass. Sch. of Law at Andover, Inc. v. United
States, 118 F.3d 776, 783 (D.C. Cir. 1997). Specifically, the Court should review the proposed
Final Judgment in light of the violations charged in the complaint. Id. (quoting United States v.
Microsoft Corp., 56 F.3d 1448, 1462 (D.C. Cir. 1995) ("Microsoft")).

Before entering the proposed Final Judgment, the Court is to determine whether the
Judgment "is in the public interest." 15 U.S.C. § 16(e). The Tunney Act states that, in making
that determination, the Court may consider:

the competitive impact of such judgment, including termination of alleged
violations, provisions for enforcement and modification, duration of relief
sought, anticipated effects of alternative remedies actually considered,
whether its terms are ambiguous, and any other competitive considerations
bearing upon the adequacy of such judgment that the court deems
necessary to a determination of whether the consent judgment is in the
public interest; and

the impact of entry of such judgment upon competition in the relevant
market or markets, upon the public generally and individuals alleging
specific injury from the violations set forth in the complaint including
consideration of the public benefit, if any, to be derived from a
determination of the issues at trial.

15 U.S.C. § 16(e)(1).

The United States described the courts' application of the Tunney Act public interest
standard in the Competitive Impact Statement filed with the Court on October 2, 2006.

III. SUMMARY OF PUBLIC COMMENTS AND RESPONSES

During the sixty-day comment period, the United States received four comments from
dairy farmers in Kentucky, one comment from a former Southern Belle employee, one comment
on behalf of a cooperative of dairy farmers in Kentucky, and one anonymous comment. These
comments are attached in the accompanying Appendix. After reviewing the comments, the
United States continues to believe that the proposed Final Judgment is in the public interest.

A. Southeast Graded Milk Producers Association

Southeast Graded Milk Producers Association ("SEGMPA"), a cooperative of dairy
farmers in Kentucky, submitted a comment which both thanked the government for challenging
DFA's acquisition of its interest in Southern Belle, and expressed concerns about DFA's raw
milk procurement practices. SEGMPA has been a long-time supplier of raw milk to Southern
Belle. When SEGMPA tried to re-negotiate its supply contract with Southern Belle in 2006,
Southern Belle decided not to renew the contract. SEGMPA then negotiated an agreement to
supply raw milk to the Flav-O-Rich dairy in London, Kentucky. Flav-O-Rich is owned by
National Dairy Holdings ("NDH"), which itself is 50%-owned by DFA. Shortly after the
contract negotiations with Flav-O-Rich concluded, Flav-O-Rich told SEGMPA that it could not
go through with the supply contract, since DFA is the raw milk supplier to NDH's dairies,
including Flav-O-Rich. According to SEGMPA, this left it with no outlet for its members' raw
milk other than Southern Belle. SEGMPA went back to Southern Belle, and although it was able
to negotiate a new raw milk supply contract, it was on much less favorable terms than it had
previously negotiated. SEGMPA is concerned that in the future it will not be allowed to
compete with DFA for raw milk supply contracts at Southern Belle, and urges that the
government ensure that there is competition for raw milk as well as for school milk.

SEGMPA acknowledges in its comment that these raw milk concerns are different from
the harm to competition for school milk alleged in the Amended Complaint and addressed by the
proposed Final Judgment. While the government brought this case to protect competition in the
market for the sale of milk served by schools in Kentucky and Tennessee, SEGMPA's concerns
are about a different market, viz. the sale of raw milk to dairy processors like Southern Belle and
Flav-O-Rich. Under the Tunney Act, however, a court's public interest determination is limited
to whether the government's proposed Final Judgment remedies the violations alleged in its
Amended Complaint. A review of the market for raw milk, which was not at issue in this
litigation, would be inappropriate because it would construct a "hypothetical case and then
evaluate the decree against that case," something the Tunney Act does not authorize. Microsoft,
56 F.3d at 1459.

B. Carl Phelps

A former Southern Belle employee, Carl Phelps, submitted a comment expressing
concerns about the effect of the divestiture on the market for raw milk in Kentucky. As a
Southern Belle employee, Mr. Phelps was the plant's contact with the dairy farmers that supplied
Southern Belle with raw milk and the haulers that transported the milk from the farms to the
Southern Belle plant in Somerset, Kentucky. When SEGMPA negotiated a milk supply contract
with Flav-O-Rich as a result of Southern Belle's decision not to renew its raw milk supply
contract with SEGMPA, Mr. Phelps resigned from Southern Belle and joined Flav-O-Rich as a
liaison between the plant and SEGMPA's members. Shortly after the contract negotiations with
Flav-O-Rich concluded, Mr. Phelps was told that the contract between Flav-O-Rich and
SEGMPA would not be finalized.

Mr. Phelps's first concern is that, in the future, Prairie Farms will not contract with
SEGMPA for Southern Belle's raw milk, but instead choose to supply the plant with raw milk
from its own members or DFA. This would effectively leave SEGMPA no customers for its
members' raw milk, forcing SEGMPA to fold and its members to either join DFA or Prairie
Farms. Mr. Phelps is concerned about these alternatives because he understands that SEGMPA's
members have approached Prairie Farms about joining that co-op, but have been turned down. If
SEGMPA were to shut down, Mr. Phelps contends that DFA would be the only outlet for
SEGMPA's former members and would be able to reduce prices paid to farmers because it would
have no competition.

This concern about competition in the market for raw milk is not related to competition in
the markets for school milk at issue in this case. Mr. Phelps, like SEGMPA and other
commentors expressing concerns about competition in the market for the sale of raw milk, does
not argue that the proposed Final Judgment is not "within the reaches of public interest." Nor do
they contest that because of their concerns about the market for raw milk, the divestitures
required by the proposed Final Judgment will not remedy the competitive harm alleged in the
Amended Complaint. Rather, Mr. Phelps and these other commentators raise competitive issues
in markets separate and distinct from those relevant to this matter.

Mr. Phelps's second concern is that, despite the divestiture of Southern Belle to Prairie
Farms, DFA still may be able to influence Southern Belle's behavior in the school milk markets
at issue because DFA and Prairie Farms are joint venture partners in the Roberts Dairy, Hiland
Dairy, and Turner Dairy. He suggests that a third party monitor Prairie Farms to ensure that its
operation of Southern Belle is totally independent of DFA, and that Southern Belle will compete
with dairies partially owned by DFA, such as Flav-O-Rich.

Mr. Phelps's concern that joint ventures between Prairie Farms and DFA will affect
Prairie Farms' operation of Southern Belle was considered by the government when evaluating
Prairie Farms as a potential purchaser of Southern Belle. The government believes that the joint
ventures will not undermine the proposed relief for several reasons.

First, these joint ventures involve dairies located in completely different geographic
markets than those in which Southern Belle competes for school milk contracts. The Roberts and
Hiland dairies, both 50%-owned by Prairie Farms and DFA, are located in Arkansas, Iowa,
Kansas, Missouri, Nebraska, and Oklahoma. In addition, Prairie Farms recently acquired a
partial ownership interest in the Turner dairy, which has plants in Arkansas, Kentucky, and
Tennessee, and is 20%-owned by DFA. Turner's Kentucky plant is in Fulton, on the far western
edge of the state, and does not compete against Southern Belle for school milk contracts.

Second, because these joint ventures involve different markets, Prairie Farms will not
have the same incentive to lessen competition between Southern Belle and Flav-O-Rich (or any
other DFA-affiliated dairy) that led to the filing of this case. The government challenged DFA's
acquisition of a 50% ownership interest in Southern Belle because DFA's partial ownership of
both Southern Belle and Flav-O-Rich created a substantial incentive to reduce competition
between those two dairies. The acquisition of Southern Belle by Prairie Farms has eliminated
that common ownership between those two dairies. In the future, Prairie Farms will have a
strong incentive to compete to obtain school milk contracts for its Southern Belle dairy at the
expense of Flav-O-Rich. The dairies jointly owned by Prairie Farms and DFA do not compete
for school milk contracts with Southern Belle, so Prairie Farms will not be able to reduce
competition for school milk between Southern Belle and any of those dairies.

Third, the government evaluated and approved Prairie Farms as a buyer of Southern Belle
because it has a demonstrated ability to operate dairy processors and compete for school milk
contracts independent of any influence or control by DFA. Prairie Farms, as an agricultural
cooperative of dairy farmers, has an economic incentive to supply its processing plants with raw
milk from its members, so it is not dependent on DFA for its raw milk supply to its wholly
owned processing plants. Its dairies compete for school milk contracts, and there is no evidence
that it competes less effectively in geographic markets where it competes against processing
plants partially owned by DFA.

Finally, the proposed Final Judgment protects against DFA's ability to exert control over
Southern Belle. Section XI of the proposed Final Judgment prohibits DFA from reacquiring,
directly or indirectly, any ownership interest in Southern Belle. As a result, if Prairie Farms
transferred the assets of Southern Belle to one of its joint ventures with DFA, DFA would be in
violation of the proposed Final Judgment. The government reviewed the terms of the proposed
sale to Prairie Farms, and is confident that DFA will not retain any control over Southern Belle.
If the government learned of any agreement prohibited by the proposed Final Judgment, pursuant
to Section X it could inspect DFA's records and request reports from DFA regarding its
compliance. Similarly, this Court retains jurisdiction under Section XII of the proposed Final
Judgment to enforce the proposed Final Judgment and punish any violations. For these reasons,
the government believes that Mr. Phelps's suggested modification to the proposed Final
Judgment is not warranted.

C. William R. Sewell and Bill L. Guffey

William R. Sewell and Bill Guffey, two dairy farmers from Kentucky, submitted
comments raising the concern that the competition for raw milk in Kentucky could be lessened if
SEGMPA is not able to supply Southern Belle with raw milk. As is the case with Carl Phelps's
concerns about the market for raw milk, the concern expressed by Messrs. Sewell and Guffey
does not address a violation alleged in the Amended Complaint, nor does their concern question
whether the proposed Final Judgment remedies the harm alleged in the Amended Complaint.

D. Bradley J. Marcum

Bradley J. Marcum, a dairy farmer from Alpha, Kentucky, submitted a comment
expressing concerns about the raw milk purchasing practices for Southern Belle after its
divestiture to Prairie Farms. He notes that Prairie Farms has retained many of Southern Belle's
key employees, and suggests that, therefore, DFA still influences Southern Belle's decisions.

To the extent that Mr. Marcum's comment suggests that the adequacy of the divestiture of
Southern Belle to Prairie Farms as a remedy to the Amended Complaint's allegations is
undermined by Prairie Farms' retention of Southern Belle's employees, the government
disagrees. Permitting Southern Belle's new owner to retain the plant's existing employees
allows it to maintain the plant's customer accounts and keep its operations running smoothly
with minimal interruption. The continued efficient operation of the Southern Belle dairy during
the transition to a new owner was the reason why Section IV.F of the proposed Final Judgment
was included. This section expressly allows a purchaser of Southern Belle to retain the plant's
employees. Section IV.F also requires DFA to "not interfere with any negotiations by the
Acquirer to employ any employee whose primary responsibility is the production, sale, marketing
or distribution of products from the Southern Belle Dairy." By retaining employees who have
been responsible for Southern Belle's operations, marketing, and sales, but who no longer have
any connection to DFA, Southern Belle is better able to compete against Flav-O-Rich and other
processing plants for school milk and other accounts.

E. Ronald Patton

Ronald Patton, a dairy farmer and past-president of SEGMPA, submitted a comment
expressing concerns that other parties were not allowed to purchase DFA's interest in Southern
Belle, including a local group of potential investors who wished to operate the Southern Belle
plant independent of DFA or any other processing company. Mr. Patton is concerned that Prairie
Farms' purchase from DFA of Southern Belle and its 2006 purchase from DFA of Turner Dairies
indicates that other parties were foreclosed from bidding on Southern Belle.

As described in Section IV of the proposed Final Judgment, DFA was required to inform
"any potentially qualified purchaser making inquiry regarding a possible purchase of the
[Southern Belle dairy] that such assets are being offered for sale," and provide information about
Southern Belle to all potential purchasers. The government, pursuant to Section IX.B-E of the
proposed Final Judgment, received periodic updates on the inquiries DFA received from parties
interested in purchasing Southern Belle, and the status of DFA's negotiations with those
interested parties. Based on these updates, the government is aware that DFA received multiple
offers to buy Southern Belle.

The proposed Final Judgment does not require DFA to accept a particular offer, only that
any acquirer of Southern Belle meet the conditions set out in Section IV.H(1)-(2). These
provisions require Southern Belle to be sold to a purchaser who "has the intent and capability
(including the necessary managerial, operational, technical and financial capability) of competing
effectively in school and fluid milk markets in Kentucky and Tennessee, . . . [and] that none of
the terms of any agreement between [the purchaser] and DFA give DFA the ability to act
unreasonably to raise the [purchaser's] costs, to lower the [purchaser's] efficiency, or otherwise
to interfere with the ability of the [purchaser] to compete effectively." The government
reviewed information from both DFA and Prairie Farms regarding the purchase of Southern
Belle and the presence of Prairie Farms in school milk markets in Kentucky and Tennessee. As
noted earlier, Prairie Farms owns and operates multiple dairy processing plants elsewhere in the
country, and has the knowledge and expertise to operate the Southern Belle Dairy efficiently,
including the dairy's school milk business. It also has the capacity to supply its dairies with raw
milk independent of DFA, whether through its own members or through other suppliers such as
SEGMPA. The purchase agreement between Prairie Farms and DFA has no terms or conditions
that would adversely affect the costs, efficiencies, or ability of Southern Belle to compete
effectively for school and fluid milk sales. Based on this information, the government approved
Prairie Farms as a buyer of Southern Belle because it met the requirements of Section
IV.H(1)-(2) of the proposed Final Judgment.

F. Anonymous

The United States received an anonymous comment expressing the opinion that DFA
agreed to sell Southern Belle to Prairie Farms because the sale would somehow allow DFA to
eliminate SEGMPA as a competitor for raw milk contracts, and that Prairie Farms would refund
the purchase price of the Southern Belle dairy back to DFA through some type of rebate
mechanism. This commentor provides a lengthy history of Southern Belle, and suggests that
DFA divested Southern Belle to Prairie Farms because it negotiated a side deal with Prairie
Farms to have the new owner take steps to force SEGMPA out of business. The commentor,
however, did not provide any evidence of such an agreement.

This comment's concerns about the market for raw milk, like other comments discussed
earlier, are not germane to the evaluation of the conduct alleged in the Amended Complaint and
addressed by the proposed Final Judgment. The government has no evidence of a side agreement
between Prairie Farms and DFA relating to the sale of Southern Belle. If there were credible
evidence of such an agreement, the government could investigate any potential violations of the
proposed Final Judgment pursuant to its inspection rights in Section X of the proposed Final
Judgment, and if it believed any provisions of the proposed Final Judgment were violated,
Section XII of the proposed Final Judgment allows this Court to fashion an appropriate remedy.

IV. CONCLUSION

After careful consideration of the public comments, the United States concludes that entry
of the proposed Final Judgment will provide an effective and appropriate remedy for the antitrust
violations alleged in the Amended Complaint and is therefore in the public interest. Accordingly,
after publication of this Response in the Federal Register pursuant to 15 U.S.C. § 16(b) and (d),
the United States will move this Court to enter the Final Judgment.

1. Prairie Farms and DFA executed a purchase agreement
for Southern Belle's assets on October 2, 2006. In keeping with the
United States' standard practice, the proposed Final Judgment does not
prohibit the completion of the divestiture before it is entered. See
ABA Section of Antitrust Law, Antitrust Law Developments 387
(5th ed. 2002) (noting that "[t]he Federal Trade Commission (as well
as the Department of Justice) generally will permit the underlying transaction
to close during the notice and comment period"). Such a prohibition
could interfere with many time-sensitive deals, prevent or delay the
realization of substantial efficiencies, and delay effective relief.